With tax season upon us, we thought March would be a good time to share a brief overview of some tax benefits that come with the main types of trusts. In general, one of the main tax benefits of trusts is that the beneficiary is not subject to a large amount of inheritance or estate taxes.
Family Trust (Revocable Living Trust)
You don’t have to be among the super-wealthy to take advantage of a Family Trust, also known as a revocable living trust. Even if you have ordinary assets, such as owning your own home, this type of trust can be a beneficial part of your estate plan.
You can set up a Family Trust to enable the transfer of financial assets without being subject to a gift tax. Beneficiaries can be designated one by one, and the terms can be changed if needs change (hence the word, “revocable”). However, a revocable trust does not avoid or reduce income tax.
Irrevocable Trust
Revocable and irrevocable trusts are both considered “living” trusts. You can use these trusts to transfer property to your heirs or to another person during your lifetime. A trust can also be used to shelter assets and income from creditors. An irrevocable trust, by definition, cannot be changed but carries some important tax advantages.
To the IRS, an irrevocable trust includes property that no longer belongs to you, and so the assets will not be subject to estate tax after your death.
Charitable Trust
If you’re ready to make a generous donation to a charity of your choice, this type of trust may be for you. It allows you to designate a qualified charity as a trustee of the property you want to donate. It also carries some potential tax benefits, starting with the income tax deduction for the value of the donation.
Charitable trusts are irrevocable, so when a valuable asset is transferred to a trust, you no longer have ownership over it. Because it is no longer your property, it is not considered when calculating potential estate tax obligations. These savings can be significant.
The Takeaway
Trusts are a valuable financial planning instrument with many advantages for estate planning, with possible tax benefits. They are a complex financial tool, so you’ll want to consult with a Sussan, Greenwald & Wesler attorney to help you create the trust that works best for you and your family. We are here to help you draft a trust as part of your estate plan, but keep in mind that specific tax questions should be directed to your accountant or tax attorney.